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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | More Risk, Less Return - A Survey on ESG Risk and Return Expectations |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 46 |
| Date | 2020 |
| Zusammenfassung | This bachelor thesis explores individual expectations concerning risk and return. A cornerstone of standard finance theory is the proposition that there is a positive association between a stock’s risk and its return. The purpose of this thesis is to survey if laypeople and investment specialists do agree with this principle. Further, we elicit the expected relationship between market risk (as defined by the Capital Asset Pricing Model (CAPM)) and return. The focus of this study is, however, on a relatively new kind of risk that recently received increasing attention – so-called environmental, social, and governance (ESG) risk. ESG factors have emerged as non-financial standards when evaluating companies. They capture a firm’s performance in a variety of different issues, such as its environmental responsibility, its social responsibility, and the quality of its governance. We define ESG risk, for this study, as the adverse financial consequences of a company’s bad performance in ESG issues. Negative consequences can be fines or reputational damage, which in turn will influence the stock price, and therefore pose a financial risk for investors. We survey two distinct audiences to explore the consistencies regarding risk-return expectations - first, a representative sample for German-speaking Switzerland of 100 probands, and second, a sample of 60 investment specialists. The responses from the investment specialist sample were collected from the CFA Institute as well as the Center for Portfolio Management at the University of Zurich, to ensure qualified responses. The survey elicits judgments regarding relationships between risk and return by asking participants to compare two fictitious equity portfolios associated with different risks. Descriptive analysis of the results suggests that most of the participants from the representative sample (laypeople) expect a positive relationship between risk and return. The vast majority of participants are consistent with their expectations throughout the three different classes of risk. Logistic regression models were used to control for demographic characteristics. The results from the investment specialist sample show that the majority of professionals expect a positive relationship between general risk and return. An equally vast majority is in line with the financial market principle, suggested by the CAPM that there is a positive relationship between market risk and return. However, other than the results from the representative sample suggests, most professionals seem to expect a negative relationship between ESG risk and return. This indicates that contrary to laypeople from the representative survey, investment specialists are not consistent in their expectations. The survey results do not provide explanations as to why individual results are observed. Why we observe inconsistencies in expectations within the investment specialist sample remains unexplained. Additionally, the results contradict prior research in behavioral finance, which suggests that investors expect a negative relationship between risk and return. A possible explanation might be that the survey conducted asks what participants believe, in the form of a principle, whereas previous studies present participants with real assessment tasks on individual stocks. Therefore, there might be a disconnect between what participants believe in and what they would do in practice when forming judgments. |
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